The economy from collapse of financial sector

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Economics 304WD -- Homework - Lesson 7 - The Fed and the Money Supply 80 pts
 You need to show your work, not just the final answer
 Use the template to complete your work or points will be taken off.
 Be sure your assignment is all on one file. Failure to submit a single file will
result in points being deducted
1. (5 points) What is the equation for the ‘more realistic’ money multiplier?
Money Multiplier = (1+C/D)/ (C/D)+(R/D)
2. In the economy, the following statistics describe the money supply:
C = $1,250b
R = $125b
D = $1,500b
Given these data, calculate the following to whole numbers unless noted otherwise:
a) (5 points) Monetary Base (BASE):
Monetary Base = C + R = $1250+$125= $1375
BASE =
b) (5 points) Money Supply (M):
M/MB = C+D/C+R
Or, M/1375 = (1250+1500)/(1250+125)
Or, M/1375= 2750/1375
Or, M = 2750
M =
c) (5 points) Ratio of reserves to deposits (res): (carry out to four decimals)
R/D = 125/1500
Or, R/D = 0.0833 res =
1
1375
2750
0.0833

d) (5points) Ratio of currency to deposits (cu): (carry out to four decimals)
CU = C/D =1250/1500
cu =
e) (5 points) Money Multiplier (mm): (carry out to four decimals)
Mm = 1+c/r+c
=1+0.8333/(0.0833+0.8333)
= 1.8333/0.9166
= 2.0001
mm =
Now suppose a shock causes banks to change the amount of reserves they hold relative to
deposits so that res changes to 0.0694. Suppose that when this happens, both cu and
BASE do not change. However, the change in res will affects mm, M, C, R, and D.
Calculate the following:
a) (5 points) Money Multiplier (mm): (carry out to four decimals)
mm =
mm= (1+0.8333)/(0.0694+0.8333)
= 1.8333/0.9027
= 2.0309
f) (5 points) Money Supply (M):
M = mm * Base
= 2.0309*1375
= 2792
M =
g) (5 points) Bank Deposits (D):
R/D = 0.0694
Or, R = 0.0694D
C/D = 0.8333
Or, C = 0.8333D
M = C + R
Or, 2792 = 0.0694D + 0.8333 D
2
0.8333
2.0001
2.0309
2792